Spousal Buy-Out Debt
Generally, a taxpayer’s home mortgage interest is limited to the interest on acquisition debt and $100,000 of equity debt. Sometimes, in a divorce action, one spouse will buy out the other. Often in these situations, the buying spouse will incur additional debt to buy out the other spouse. In Notice 88-74, the IRS has stated that in this situation, the additional debt secured by the home to buy out the other spouse, will be treated as acquisition debt.